UK R&D Tax Credits for the IoT Sector
The IoT sector is intrinsically linked to innovation and growth. The sector is growing at a rapid pace and barriers to adoption are becoming lower in the manufacturing, transportation and
However, many business owners in the IoT space (and technology space at large) are not aware that investment in creating new products or improving their existing products often enables them to claim significant funds annually through the UK government’s R&D tax credits scheme.
The R&D scheme was set up to incentivise technology innovation and can be lucrative; In a typical case of a company that has less than 500 employees and has an annual turnover of less than £75,000,000 companies can claim back an annual benefit of up to 33% of their eligible R&D expenditure, including salaries, contractor costs, materials and consumables.
In this article we explore the R&D tax credit scheme in the context of the IoT sector and give some examples of activities that would enable companies to claim. Our aim is to encourage business owners in the IoT sector to assess their own eligibility and to explore the scheme further if they are not already claiming.
Software development for IoT
Software development in the IoT sector is rich in opportunities for claiming R&D tax credits. There are two criteria that must be met for a project to qualify. Firstly, there needs to be an advance in technology – in other words, the project should add to the existing pool of knowledge in the industry or yield a product or process that is either new to the industry or appreciably improve existing products or processes. (Please note that the claims process does not involve releasing any of a project’s details or IP to the public).
The second criterion is that there needs to be ‘resolution of technological uncertainty’. This means that in order to qualify, a project should have some degree of uncertainty at the outset about either whether the technical goals can be achieved, or how to achieve the goals in practice.
Software development projects in IoT often involve new integration methods or a high degree of experimentation. Since the sector is still relatively young and IoT technologies are evolving rapidly, developers in the IoT sphere are more likely to use non-standard development methods and architectures. These factors would enable their companies to claim through the scheme.
Below are a few examples of specific software-related activities that are likely to qualify for the scheme:
- Developing firmware for IoT devices
- Developing applications that process and analyse large amounts of data from IoT devices
- Designing machine learning algorithms and neural network applications for IoT ecosystems
- Developing APIs that make it possible for IoT ecosystems to integrate with legacy systems
The legislation that governs the eligibility of the scheme is purposefully broad and each project should be assessed on its own merits.
Design and manufacture of IoT hardware
Manufacturing in the IoT sector is also intrinsically well-suited to the R&D tax credit scheme because the processes involved often require solving unique or novel technology challenges.
The design process of IoT devices often presents manufacturers with additional considerations and challenges than is the norm (e.g. connectivity, durability, temperature management etc.) and is likely to require more extensive prototyping and testing. In other cases, manufacturers in the sector may need to make major design changes to existing devices in order to bring them into an IoT ecosystem.
Below are a few examples of manufacturing activities that are likely to qualify:
- Prototyping new devices
- Materials testing for the manufacturing process
- Design changes that allow for integration of sensors, receivers, processors etc.
- Special considerations for durability or resilience against warm or cold temperatures (e.g. IoT devices that will be used outdoors, in cold storage etc.)
- Testing of various designs that will result in an optimal battery life or better connectivity.
Edge computing and wireless connectivity types
A project that involves solving latency issues through the use of edge computing is likely to qualify for the R&D scheme. The reason is that these techniques are at the forefront of IoT development. Best practices and industry standards are yet to be established and such projects are likely to involve testing multiple solutions before the optimal one is found.
Another rapidly evolving area of IoT involves wireless connectivity options and the way in which they can optimise IoT solutions in various situations.
Connectivity options include the variants of low-power
wide-area networks (LPWANs) such as Sigfox, RPMA, LoRaWAN and NB-IoT. Any work
that involves finding optimal connectivity solutions for IoT assets is likely
to qualify for the scheme because it is likely to involve a significant amount
of uncertainty (or risk) that would have to be resolved throughout the project.
The R&D tax credit scheme is designed to incentivise these types of activities.
Fixing security vulnerabilities in IoT systems
Projects that solve information security problems of IoT assets at the hardware, software or firmware level are also likely to be eligible for the R&D tax credit scheme. Such projects would typically include many elements that attract the R&D benefit: input of highly qualified specialists, use of methodologies that are not well-established in the industry, a high degree of experimentation and technical problem-solving.
In this article we explored several scenarios in which firms in the IoT sector can take advantage of the R&D tax credit scheme. Given the rapid pace of innovation in IoT and the huge potential of IoT in many industry sectors, for the foreseeable future, there will be many opportunities for IoT innovators to maximise their return on investment in R&D by reclaiming tax annual credits.
About the Author
Micah Levy is Co-founder and Managing Director of Innovation Plus, a boutique advisory firm whose goal is to help companies